ETF trading above NAV

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CarpeDiem22
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ETF trading above NAV

Post by CarpeDiem22 » Mon Oct 22, 2018 11:37 am

I have one ETF that is fairly liquid with reasonable bid-ask spread but what surprises me is that the ETF consistently trades about 5% above its NAV. Why would that happen? The ETF is supposed to track a free-float market cap based underlying index, and is mandated to hold same stocks with same weights as the index. Every month when I invest in the ETF, I feel like I am throwing away 5% as I feel that trading price will align with the NAV in the long term. Please note that both bid and ask quotes are above NAV, and I have been observing this for past 6 months or so. Thanks!

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oldcomputerguy
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Re: ETF trading above NAV

Post by oldcomputerguy » Mon Oct 22, 2018 11:38 am

What's the ticker of the ETF?
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

CarpeDiem22
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Re: ETF trading above NAV

Post by CarpeDiem22 » Mon Oct 22, 2018 11:10 pm

oldcomputerguy wrote:
Mon Oct 22, 2018 11:38 am
What's the ticker of the ETF?
Here. Not listed in the US.
https://www.nseindia.com/live_market/dy ... ymbol=M100
https://www.valueresearchonline.com/fun ... code=12012

indexfundinvestor.eu
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Re: ETF trading above NAV

Post by indexfundinvestor.eu » Tue Oct 23, 2018 4:42 am

ETFs are traded in the stock market between the market's participants unlike mutual funds which are sold by the fund company. Therefore, the ETF's price oscillates according to supply/demand. At least in the US/EU the role of an authorized participant (https://www.investopedia.com/terms/a/au ... cipant.asp) is to arbitrage these price differences and as a result bring the price back to the NAV.
I am not sure where the ETF you shared is domiciled (I am assuming India) and how the APs are supposed to act in that regulatory environment. In case the ETF price is noticeably always above the NAV perhaps the APs are not finding it profitable to arbitrage those prices but I don't have much insight into your particular case.

CarpeDiem22
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Re: ETF trading above NAV

Post by CarpeDiem22 » Wed Oct 24, 2018 8:38 am

In case anybody is interested, I wrote to the fund house and got the below response:
With reference to the below mail, we would like to inform you that current market maker is not actively managing the price on exchange. We are in process to empanel new authorised participants on a board within a month time frame.
I hope they deliver on the promise.

alex_686
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Re: ETF trading above NAV

Post by alex_686 » Wed Oct 24, 2018 9:56 am

So here is a follow up questions.

What index is it trying to track?
How liquid is the underlying stocks?
Are there options / futures on the index?
What is the relative volume of trading of the ETF?
Is the ETF trading in the same market, time zone, and currency as the underlying stocks?

CarpeDiem22
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Re: ETF trading above NAV

Post by CarpeDiem22 » Wed Oct 24, 2018 10:52 pm

alex_686 wrote:
Wed Oct 24, 2018 9:56 am
So here is a follow up questions.

What index is it trying to track? NIFTY Midcap 100
How liquid is the underlying stocks? Not very sure but only liquid stocks are selected to be part of the index.
Are there options / futures on the index? I think no.
What is the relative volume of trading of the ETF? Relative to the entire stock exchange? Small I'd say.
Is the ETF trading in the same market, time zone, and currency as the underlying stocks? Yes

AlphaLess
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Re: ETF trading above NAV

Post by AlphaLess » Thu Oct 25, 2018 12:39 am

There is almost no volume in that product:

https://www.nseindia.com/live_market/dy ... ymbol=M100#

Click on "Historical Data", then click on desired number of days in the drop-down, and then click "Submit".

Date Symbol Series Open High Low LTP Close Volume Turnover (in Lakhs)
24-Oct-2018 M100 EQ 19.14 19.15 18.85 19.05 19.05 3,261 0.62
23-Oct-2018 M100 EQ 19.50 19.50 18.90 18.90 19.00 7,893 1.50
22-Oct-2018 M100 EQ 18.05 19.26 18.05 19.10 19.10 13,311 2.54
19-Oct-2018 M100 EQ 19.00 19.00 18.75 19.00 18.88 6,744 1.28
17-Oct-2018 M100 EQ 19.00 19.25 18.76 19.00 18.78 2,246 0.43
16-Oct-2018 M100 EQ 18.99 19.20 18.70 19.08 19.05 3,578 0.68
15-Oct-2018 M100 EQ 18.74 18.90 18.62 18.90 18.80 7,465 1.40
12-Oct-2018 M100 EQ 18.25 18.70 18.20 18.70 18.63 7,944 1.46
11-Oct-2018 M100 EQ 18.25 19.49 16.08 18.10 17.90 87,019 15.71
"You can get more with a kind word and a gun than with just a kind word." George Washington

CarpeDiem22
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Re: ETF trading above NAV

Post by CarpeDiem22 » Thu Oct 25, 2018 2:45 am

AlphaLess wrote:
Thu Oct 25, 2018 12:39 am
There is almost no volume in that product:

https://www.nseindia.com/live_market/dy ... ymbol=M100#

Click on "Historical Data", then click on desired number of days in the drop-down, and then click "Submit".

Date Symbol Series Open High Low LTP Close Volume Turnover (in Lakhs)
24-Oct-2018 M100 EQ 19.14 19.15 18.85 19.05 19.05 3,261 0.62
23-Oct-2018 M100 EQ 19.50 19.50 18.90 18.90 19.00 7,893 1.50
22-Oct-2018 M100 EQ 18.05 19.26 18.05 19.10 19.10 13,311 2.54
19-Oct-2018 M100 EQ 19.00 19.00 18.75 19.00 18.88 6,744 1.28
17-Oct-2018 M100 EQ 19.00 19.25 18.76 19.00 18.78 2,246 0.43
16-Oct-2018 M100 EQ 18.99 19.20 18.70 19.08 19.05 3,578 0.68
15-Oct-2018 M100 EQ 18.74 18.90 18.62 18.90 18.80 7,465 1.40
12-Oct-2018 M100 EQ 18.25 18.70 18.20 18.70 18.63 7,944 1.46
11-Oct-2018 M100 EQ 18.25 19.49 16.08 18.10 17.90 87,019 15.71
As I look at the order book right now, the bid price is INR 19.00 and offer price is INR 19.04. That's a spread of less than 1 US penny. If I ignore the small bids and offers quantity-wise, the bid price is INR 18.96 and offer price is 19.05. That's still less than 1 US penny. What I don't understand is that if APs are doing a lousy job, who in the world is keeping spreads so tight.

AlphaLess
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Re: ETF trading above NAV

Post by AlphaLess » Thu Oct 25, 2018 9:41 am

CarpeDiem22 wrote:
Thu Oct 25, 2018 2:45 am
AlphaLess wrote:
Thu Oct 25, 2018 12:39 am
There is almost no volume in that product:

https://www.nseindia.com/live_market/dy ... ymbol=M100#

Click on "Historical Data", then click on desired number of days in the drop-down, and then click "Submit".

Date Symbol Series Open High Low LTP Close Volume Turnover (in Lakhs)
24-Oct-2018 M100 EQ 19.14 19.15 18.85 19.05 19.05 3,261 0.62
23-Oct-2018 M100 EQ 19.50 19.50 18.90 18.90 19.00 7,893 1.50
22-Oct-2018 M100 EQ 18.05 19.26 18.05 19.10 19.10 13,311 2.54
19-Oct-2018 M100 EQ 19.00 19.00 18.75 19.00 18.88 6,744 1.28
17-Oct-2018 M100 EQ 19.00 19.25 18.76 19.00 18.78 2,246 0.43
16-Oct-2018 M100 EQ 18.99 19.20 18.70 19.08 19.05 3,578 0.68
15-Oct-2018 M100 EQ 18.74 18.90 18.62 18.90 18.80 7,465 1.40
12-Oct-2018 M100 EQ 18.25 18.70 18.20 18.70 18.63 7,944 1.46
11-Oct-2018 M100 EQ 18.25 19.49 16.08 18.10 17.90 87,019 15.71
As I look at the order book right now, the bid price is INR 19.00 and offer price is INR 19.04. That's a spread of less than 1 US penny. If I ignore the small bids and offers quantity-wise, the bid price is INR 18.96 and offer price is 19.05. That's still less than 1 US penny. What I don't understand is that if APs are doing a lousy job, who in the world is keeping spreads so tight.
There are a lot of trading participants (market makers), who are not quoting off the NAV.
Other ones are quoting off the NAV. Authorized participant would be JUST ONE OF THOSE.
It is unclear if there is a fundamental reason that price should be higher than NAV.
"You can get more with a kind word and a gun than with just a kind word." George Washington

alex_686
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Re: ETF trading above NAV

Post by alex_686 » Thu Oct 25, 2018 11:13 am

AlphaLess wrote:
Thu Oct 25, 2018 9:41 am
There are a lot of trading participants (market makers), who are not quoting off the NAV.
Other ones are quoting off the NAV. Authorized participant would be JUST ONE OF THOSE.
It is unclear if there is a fundamental reason that price should be higher than NAV.
I am doing this with no research, just a deep background in ETFs.

To add to this, for the creation unit process to work, the market needs to be liquid enough that the AP can buy the underlying stock and sell the ETF at the same time. A stock can have narrow spreads but still be illiquid. I doubt that there is any depth to the market. It might be able to absorb 100s of shares but not the 1000s of shares required for the arbitrage process to work.

Normally a ETF trades at a premium like this because something funky is going on with the underlying stocks. This happened both during the 2000-2001 and 2008 crisis where some of the underlying markets got locked up but not the ETFs. If the underlying stocks are liquid than I am not sure. I would guess government or regulatory rule.

CarpeDiem22
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Re: ETF trading above NAV

Post by CarpeDiem22 » Thu Oct 25, 2018 9:10 pm

Ok, thanks for the replies everyone. I'll watch this ETF for a while for any improvement, else will start putting my money elsewhere.

AlphaLess
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Location: Kentucky

Re: ETF trading above NAV

Post by AlphaLess » Thu Oct 25, 2018 9:44 pm

CarpeDiem22 wrote:
Thu Oct 25, 2018 2:45 am
As I look at the order book right now, the bid price is INR 19.00 and offer price is INR 19.04. That's a spread of less than 1 US penny.
Well, 1 cent or not, this is a large spread: 0.04/19.00 = 0.21%.
"You can get more with a kind word and a gun than with just a kind word." George Washington

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